organization studies chapter 1.3
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Focuses on economic reasons for the existence of firms
Some parts of OE focus on equilibrium-based models of economics (not all)
What Distinguishes OE from Other Research Streams in Org Studies?
Most economists focus on markets, OE focuses on firms
Organizational economists tend to focus on the relationship between competition and firms
What Distinguishes OE from Other Streams in Economics Research?
Transaction Cost Economics (Williamson 1975) Agency Theory (Jensen & Meckling 1976) Strategic Management Theory Co-Operative Organizational Economics
Four Main Areas in OE
Coase (1937) questioned the lack of treatment in economics to the theory of the firm.
Firms exist because some exchanges are better managed (cost less) inside organizations as opposed to across markets
Coase placed transaction costs at the center of analysis of firms – which led to TCE
Why Do Organizations Exist?
Teams outproduce individuals Individuals on teams have incentives to
shirk Teams will assign a monitor who gathers the
profits from teamwork and pays members accordingly
The “monitor” is the shareholder, which suggests why firms form
Teamwork – Alchian & Demsetz
Williamson 1975 Conditions of Uncertainty around Specificity
◦ Bounded rationality◦ Opportunism
Transaction Cost Economics
Vertical Integration: Make or Buy Multidivisional form Ouchi’s (1979) Markets, Bureaucracies, and
Clans Multinational Enterprise Hybrids
Applications of TCE
Focuses on cost minimization Understates the cost of organizing Neglects the role of social relationships in
economic transactions Emphasis on opportunism can be harmful
Criticisms of TCE
Do those associated with the firm agree about how it should be managed?
Major themes (Eisenhardt 1989):◦ Goal misalignment◦ Information asymmetry◦ Differences in risk tolerance
Agency Theory
Treats people as primarily financially motivated
Ignores other behavioral sciences Lack of realism in approach to governance Not necessarily generalizable Some scholars argue it is self fulfilling
Criticisms of Agency Theory
Why do some organizations outperform others?◦ Structure-Conduct-Performance (SCP)◦ Resource Based View (RBV)
Strategic Management Theory
Originated as a search for industries that lacked competition
Overly profitable industries failed to maximize social welfare
Innovation was stifled Once identified, regulation was used to
“remedy” the problem and increase competition
Structure – Conduct – Performance
Performance-enhancing industry attributes:◦ Industry concentration◦ Level of product differentiation◦ Barriers to entry
SCP – Industry Structure
Termed “monopolistic competition” by Chamberlain (1933)
Differentiating products allows firms to charge abnormal profits above the cost
Product Differentiation
Fewer firms in an industry can lead to collusive strategies
Large economies of scale required to achieve certain profits can lead to performance differences
Industry Concentration
Economies of scale Product differentiation Cost advantages independent of scale Contrived deterrance Government imposed restrictions
Barriers to Entry
Strategy research now uses SCP concepts to suggest ways firms can reduce competition◦ Porter’s Five Forces◦ Model of generic industry structure and
environmental opportunities◦ Strategic groups
Strategic Management & SCP
Porter’s Five Forces
Level of threat in an industry
Threat of rivalry
Threat of new entry
Threat of buyers
Threat of suppliers
Threat of substitutes
Industry Type Definition Opportunities ExamplesEmerging New industry or
recent developments
First Mover Advantage
Intel
Fragmented Many firms of similar sizes
Consolidation McDonald’s
Mature Slow increases in demand, repeat business, little product innovation
Service and process innovation
GE (light bulbs)
Declining Consistently reducing demand in industry
Leadership, niche, harvest, divest
General dynamics (defense)
Global Significant International sales
Multinational Nestle
Industry Structure and Opportunities
Firm performance being determined by industry fails to explain heterogeneity within industries
By focusing on “attractive” industries, opportunities in other industries are overlooked
The inversion of the research stream has, in all likelihood, counteracted its original intent of improving social welfare
Criticisms of SCP
Built on the work of:◦ Penrose (1959)◦ Schumpeter (1934)◦ Michael Ricardo
First introduced by:◦ Rumelt (1984)◦ Wernerfelt (1984)◦ Barney (1986)◦ Teece (1982)◦ Prahalad and Bettis (1986)
Resource Based View
Unit of analysis: resources and capabilities of firms◦ Financials resources◦ Physical resources◦ Human resources◦ Organizational resources
Two assumptions◦ Resources and capabilities can vary significantly across firms◦ Resources can be immobile (differences may be stable)
Resource Base View
The be sources of superior performance resources must be:◦ Valuable◦ Rare among current or potential competitors◦ Costly to imitate◦ Without close strategic substitutes
Types of imitation◦ Role of history◦ Role of causal ambiguity◦ Role of socially complex resources and
capabilities
Sustainable Competitive Advantage
Various studies suggest that firm resources may explain more about its performance than the industry within which it operates
Firms may consider “unattractive” industries ideal for their blend of resources
Instead of reducing social welfare by infringing on competition, RBV focuses on firms doing the best at something
Implications of RBV
Collusion is said to occur when the output of an industry is less than it would be in a competitive environment
Reduced production leads to increased prices, which then lead to improved performance
The collusion can also invite cheating on the agreement by one or more parties
Game theory suggests that incentives to cheat generally outweigh benefits of collusion
Collusion
Because explicit collusion is often illegal, tacit collusion is more often engaged in by firms
Tacit collusion requires managers to interpret signals by competitors because no negotiating takes place
Tacit Collusion
Tacit collusion is easier when there are◦ Few firms in an industry◦ Similar cost structures & product offerings◦ High barriers to entry◦ Monitoring competitor behaviors is uncomplicated
Industry Conditions for Collusion
Exploit economies of scale Low-cost entry into new markets Low-cost entry into new industry segments
and new industries Learning from competition Managing strategic uncertainty Managing costs and sharing risks Facilitate tacit collusion
Incentives to Form an Alliance
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